South Korea's semiconductor boom triggers "currency paradox": South Korean won's appreciation erodes chip factory profits

South Korea's semiconductor boom has created what's known as a currency paradox: The more U.S. dollars chipmakers earn, the stronger the Korean won becomes against the U.S. dollar, eroding their profits and stock price prospects.

According to data from the Economic Statistics System of the Central Bank of South Korea, the Korean won’s exchange rate against the U.S. dollar rose by 15.41% from July 1 to last Friday. During this period, the USD/KRW exchange rate fell from 1,551.2 won to 1,344.1 won. The South Korean won's gain was almost three times the yen's rise against the dollar (5.29%).

During the same period, the U.S. dollar index, which tracks the U.S. dollar against six major currencies, fell only 0.02%. The remarkable strength of the South Korean won against the U.S. dollar is mainly due to the boom in the semiconductor industry and the resulting large inflow of U.S. dollars into South Korea.

From January to August this year, South Korea's semiconductor exports reached US$281 billion, an increase of 169.6% over the same period last year. The Institute of International Finance pointed out that South Korea's huge current account surplus and domestic investment by South Korean semiconductor companies are factors that will keep the Korean won strong in the medium to long term.

But the strong Korean won is now putting pressure on chipmakers' profits. Most semiconductor exports are settled in U.S. dollars. When the Korean won appreciates against the U.S. dollar, the same amount of U.S. dollar sales costs less Korean won. Therefore, the value of these earnings is also reduced when converted into Korean won.

Analysts have lowered their forecasts. The consensus estimate for Samsung Electronics and SK Hynix's combined operating profit in 2026 has fallen by 21 trillion won in two months, from 66.1 trillion won on July 10 to 64 trillion won on Friday. The operating profit forecast for the third quarter after the merger was also lowered from 19.9 trillion won to 18.8 trillion won.

Nomura Securities estimates that a 10% appreciation of the Korean won against the U.S. dollar could reduce operating profits of South Korean memory chip makers by about 12% in the short term. SK Hynix also disclosed in its semi-annual report that a 10% decline in the U.S. dollar exchange rate against the Korean won may result in a decrease in pre-tax profits of approximately 4.75 trillion won for the chip giant.

A stronger Korean won also weighed on stock price expectations. On September 3, Citibank lowered the target share price of Samsung Electronics from 450,000 won to 430,000 won, and lowered the target share price of SK Hynix from 3.1 million won to 3 million won. Citibank said the adjustment reflected the adverse impact of currency fluctuations.